Trade Secrets

Trade secrets, in addition to patents, trademarks and copyrights, are another form of intellectual property that can be protected. In contrast to the Federal statutory schemes for protecting patents, trademarks and copyrights, trade secrets are generally protected under state law. All states have some form of legal protection for trade secrets. North Carolina’s version of such a law, enacted in 1981, is entitled the "Trade Secrets Protection Act" and can be found under the N.C. General Statutes, Chapter 66, Section 152. As for all the states, the North Carolina law is based on the Uniform Trade Secrets Act, which in 1980 codified the variety of case (i.e., "judge-made") law from around the country. There are quite a few elements to the law in North Carolina, and any legal conclusion as to what constitutes a trade secret will depend upon the facts in each circumstance. A general overview, however, can be made.

Under North Carolina law a trade secret can be a variety of forms of business or technical information. Types of information that can be protected as a "trade secret" include formulas, patterns, programs, devices, compilations of information, methods, techniques or processes. Project launch dates for new products, marketing plans, computer programs, negotiated price lists in a contract, and customer lists have all been found to be trade secrets under North Carolina law. Many of these examples are of a type of information that cannot be protected through patents, copyrights or trademarks. And, trade secret protection can potentially last forever, as long as they are kept secret and reasonable steps are taken to preserve their secrecy. Therefore, trade secrets can be an important element of any business enterprise.

Business or technical information that is generally known or readily ascertainable by independent means would not be considered a trade secret, since this information is not really considered "secret."

To be a trade secret, the business or technical information must derive some commercial value from not generally being known to others. Trade secret information need not be limited to "positive" information, but can also include negative or inconclusive data. The criterion is whether or not the information has "commercial" value. Surely knowing that a particular process will not work to produce an intended result would have value against a competitor!

Perhaps one of the most important characteristics of a trade secret under North Carolina law is that it must be "the subject of efforts that are reasonable under the circumstances to maintain its secrecy." This usually requires affirmative steps to be taken by the owner of the trade secret. First, trade secrets must be identified so that employees and business contacts can be put on notice of the secret and proprietary nature of the information. Some form of a confidentiality agreement is often essential to the protection of a trade secret, where the recipients of the trade secret are obligated to keep it confidential. Furthermore, restricted access to the information (e.g., passwords for computer-based information or secured facilities for offices or laboratories) also helps to identify the special nature of the trade secret. Conducting exit interviews for departing employees, reminding them of their obligation to keep confidential the company’s trade secrets and inquiring as to the whereabouts of information they possessed as employees, may also be essential to ensure that secrecy of the information is being reasonably maintained.

For example, describing your company’s marketing plan in an annual report distributed on your web site would prevent that plan from being considered a trade secret. Another example where trade secret status could be destroyed is taking public visitors on a tour of your facility and showing them your "top secret" device for making widgets. Neither of these examples evidence any effort to keep the information secret.

It is also important to note that obtaining patent protection is the antithesis of keeping trade secrets. To secure Federal patent protection, the patentee makes a bargain with the public – exclusive protection for a limited period of time in exchange for full public disclosure of the invention. So, once patent protection is sought, protection as a trade secret is abandoned – because there are no longer efforts to keep the trade secrets "secret."

Sometimes, however, trade secret information would be relevant to the examination of a patent application. This is particularly true in those instances where trade secret information could be "material" information with respect to patentability. Applicants have an affirmative duty to disclose "material" information to the Patent & Trademark Office and failure to do so can lead to the invalidation of patent rights. In instances where trade secret information must be disclosed, a special procedure can be used whereby the Patent & Trademark Office will prevent information from appearing in the publicly available records.

The claim to a trade secret is not affected if someone else independently discovers it, and identical trade secrets can coexist without conflict. In this regard, trade secrets differ from patent protection in that there can be only one "patented" invention. Independent discovery is not a defense to patent infringement unless one can demonstrate that they invented it first.

Owners of trade secrets have the right to prevent other persons from using or transferring the trade secrets without permission. Misappropriation of trade secrets is an actionable offense, and is defined in North Carolina law as the acquisition, disclosure, or use of a trade secret of another without authority or consent. Independent development or reverse engineering of a trade secret is not considered to be misappropriation.

In order to prove misappropriation, it must be shown that the accused person knew, or should have known, of the trade secret, and has had a specific opportunity to acquire it. It is important, therefore, that in the first instance the trade secret was identified and protected in order to obtain a remedy for its misappropriation.

One remedy for misappropriation under North Carolina law is an injunction in which a court protects the trade secret by ordering the offender not to further use the information. Under some circumstances, where an injunction against the use of the trade secret would be unreasonable, a court can order a royalty to be paid to the owner of the trade secret. In addition to an injunction, a court can order monetary damages be paid to the owner of the trade secret, as measured by the economic loss caused by the misappropriation. Willful and malicious misappropriation could also lead to punitive damages.

Any legal action for misappropriation must be commenced within three years after it is, or reasonably should have been, discovered. Failure to bring legal action within this period of time means the loss of the opportunity to recover damages for the misappropriation of the trade secret, or to obtain an injunction against its further use. Therefore, it is important to remain vigilant when relying upon trade secret protection for intellectual property. Furthermore, failure to protect trade secret information in one instance could decrease your ability to protect subsequent misappropriation of the same information.

This article was published in the February 2002 issue of the Triangle TechJournal.

Hutchison & Mason, PLLC is a Raleigh, North Carolina based law firm specializing in information technology and life science companies. Their web site is www.hutchlaw.com.. Article on trade, secrets by Hutchison and Mason PLLC